-- We believe that the Canadian banking sector is
encountering incremental pressure from headwinds facing the
Canadian economy, which is heightening economic risk in the
-- We also believe that industry risk for the Canadian
banking sector is increasing. We expect that intensifying
competition for loans and deposits will lead to pressure on
profitability growth, especially in banks' retail businesses.
-- We are affirming our 'AA-/A-1+' long- and short-term
issuer credit ratings on Toronto-Dominion Bank (TD Bank), and
revising the outlook to stable from negative.
-- The stable outlook reflects our expectation that TD Bank
will maintain its current credit profile in the next 24 months.
On Dec. 13, 2012, Standard & Poor's Ratings Services
affirmed its long- and short-term issuer credit ratings on
Toronto-Dominion Bank (TD Bank) at 'AA-/A-1+' and revised the
outlook to stable from negative. TD's stand-alone credit profile
(SACP) remained unchanged at 'a+'.
The rating action follows our review of banking sector
industry and economic risks in Canada taking into account the
headwinds facing the Canadian economy, Canadian consumers' high
debt levels, expectations of decelerating loan demand and
continuing pressure on margins particularly in the Canadian
retail sector, and areas of continuing weakness in the global
economy and financial system.
We believe banks operating in Canada are vulnerable to an
expanding set of potential stresses arising from competitive
pressure on growth and margins, while asset quality is
potentially vulnerable--in light of high consumer
indebtedness--to developments that may trigger general economic
deterioration in Canada. Consequently, we lowered our anchor
stand-alone credit profile (SACP), which is the starting point
for our ratings on financial institutions operating primarily in
Canada, to 'a-' from 'a'.
This is reflected in our revision of our Banking Industry
Country Risk Assessment (BICRA) for Canada to group '2' from '1'
and our revised industry risk score, a component of the BICRA,
to '2' from '1' (see "Various Rating Actions Taken On Canadian
Financial Institutions Due To Rising Industry and Economic
Risks," published Dec. 13, 2012, on RatingsDirect on the Global
We believe that the banks feel incremental pressure from
the headwinds facing the Canadian economy. The acceleration of
household debt to record levels has increased Canadian
households' vulnerability to sudden shocks in incomes,
employment, or a spike in interest rates.
Exposure to the consumer sector accounts for nearly
three-fifths of total bank loans, and losses on banks' uninsured
loan portfolios -although recent performance levels have
generally been strong- may be driven higher in the event of a
substantial shock to household creditworthiness though we expect
effective regulatory supervision to remain a positive influence
on Canadian bank credit quality.
Although we expect ongoing intensification of competitive
dynamics in the Canadian banking sector, in our view, overall
Canada still remains positioned favorably vis-a-vis most of its
global peers. However, a slowing economy risks exacerbating the
already-intense competition between banks for loan and deposit
share and puts further pressure on the margin and profitability
of the Canadian financial institutions' retail and commercial
lending businesses, the cornerstone of Canadian banking and
largest contributor to revenues.
We also believe that Canadian financial institutions' risk
tolerances may increase to compensate for lower profitability by
reaching for yield through investments, more aggressive lending
in higher yielding loans such as personal loans and credit
cards, or potentially a pickup in mergers and acquisitions
activity. Furthermore, we expect that continuing industry
conditions will test banks' operational capabilities.
Relative performance in areas such as service standards,
cost control, operational effectiveness, underwriting
discipline, and ability to integrate acquisitions will likely
contribute to changes in market position and financial
performance, and will have an impact on the relative credit
standing among industry participants.
The ratings on TD Bank reflect its revised anchor SACP of
'a-', company-specific factors, and our expectation for
extraordinary government support. Company-specific factors
include TD Bank's "strong" (as our criteria define it) business
position based on its leading Canadian retail franchise
complemented by its increasingly substantial retail banking
franchise in the eastern U.S.
The rating is also based on our assessment of TD Bank's
capital and earnings as "adequate" given its forecasted Standard
& Poor's risk-adjusted capital (RAC) ratio in the range of
7.7%-8.2% for fiscal year-end 2014 as well as its resilient
earnings capacity. We revised our assessment of the bank's risk
position to "strong" from "adequate", to reflect TD's continuing
strong asset quality metrics, favorable loss experience, and
diverse risk exposures.
The ratings are also based on our assessment of TD Bank's
funding as "average" (revised from "above average") and of its
liquidity position as "adequate". The revision of our assessment
of TD Bank's funding profile recognizes its favorable deposit
position, particularly in the U.S., counterbalanced by notable
reliance on wholesale funding, as is the case with other large
Canadian banks. The resulting SACP of 'a+' is adjusted upward
one notch in arriving at the 'AA-' issuer credit rating,
reflecting our expectation for potential extraordinary
government support in a stress scenario.
The stable outlook reflects Standard & Poor's view that TD
Bank's core retail-oriented franchise spanning both Canadian and
U.S. markets incorporates sufficient resilience to weather a
range of economic environments, even recognizing the potential
for more drawn-out recoveries in both markets.
We could lower the ratings on TD Bank if deterioration in
economic conditions were to lead to material erosion in its
profitability and capitalization, such that its RAC ratio
weakened and remained below 7% over the next 18 to 24 months.
The same result could arise if asset growth is
disproportionately focused on higher risk categories such that
overall asset performance measures would consistently and
materially exceed historical levels.
An upgrade would depend on the bank attaining an RAC ratio
consistently above 10% while maintaining its current franchise
positions in Canada and the U.S.